Financially Sustainable Schools Six Steps to Re-engineering Your School’s Financial Future

Corey McIntyre, NAIS Chief Financial Officer

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Your Financial Challenges

?

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Independent School Goals

Sustainable, Excellent, and Affordable?

NAIS school tuitions increasing faster than cost of living– Average of CPI +3% 1995 - 2005

Parents demand highest quality

Improve quality = add cost

Add cost = raise tuition

Accessibility threatened

John Maynard Keynes: “Animal Spirits” of uninformed optimism or pessimism

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Cost Disease Model – W. Baumol1

Activity Productivity stagnant

Productivity enhancing

Industries Theater, Heath care, Legal

Services, Fine Dining, Education

Manufacturing, Technology, rest of

economy

Characteristics Labor intenseHands-on

commitmentPersonal attention

Automated production

Economies of scaleConsistency

Annual productivity improvement averages

Independent schools:

0%

US economy:2%

General inflation 3% 3%Market wage increases

3% 3%

Less: productivity improvement

0% -2%

Price increases required

5% 1%

1 1966 William Baumol, William Bowen. Performing Arts: Economic Dilemma

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Group Problem-Solving ApproachesLess formal More

formalInputs Speculation

Hear-say

OpinionsAnecdote

FactsData

Processing

ReactionEmotional

response

Casual analysisJudgment

Style preference & assumptions

Systematic analysis

Analytic rigor“Clean slate”

framing

Potential Outcome

s

No new infoTreatment

of symptoms“Rinse and

repeat”

Modified viewsCourse

adjustments

New viewsComplete

overhaulMeasurable

plans

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Data-driven Decision Making

19th century Rx: Leeches

Pierre-Charles-Alexandre Louis (1830)

Mortality Rates for Treatment of pneumonia 77 patients:

– Leeches used early: 44%

– Leeches used late: 25%

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DATA

& Other Sources

STRATEGY

RIGOROUS ANALYSIS & INFORMED DEBATE

FEEDBACK

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Truth

“Truth never damages a cause that is just.”

Mahatma Ghandi

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The Six Steps

1. Trend analysis

2. Ratio analysis

3. Ten financial planning assumptions

4. Data markers of school success

5. Re-engineering strategies

6. Projecting alternative & preferred financial futures

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Step 1: Trend Analysis

Where have you come from, where are you going?

Key questions:– 5 and 10 year trends– Projection of trends into future– Defining benchmark group– External trends

Tasks:– Run your numbers– Compare to others– Collect environmental data

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0%

5%

10%

15%

20%

25%

% Chg 2000-2005 20%7%18%18%

% Chg 1995-2000 17%4%10%22%

Median tuition day

Median teacher salaries

Total headcount

Average financial aid

grant

Core Sample Trends

* Dollars adjusted for inflation.

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0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006

StatsOnline Survey Year

Cou

nt

AppsAcceptedEnrolledLog. (Apps)Log. (Enrolled)

National Admissions Trends

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Shifting Aid Applicant Pool

10

.81

0.3

10

.21

0.1

21

.7

20

.2

18

.71

8.4

22

.5

21

.32

0.3

19

.8

17

.91

7.6

17

.2

17

.1

11

.81

2.4

12

.51

2.6 1

5.4 18

.1

21 2

2.2

0

5

10

15

20

25

30

35

0-20K 20-40K 40-60K 60-80K 80-100K 100K+

00-0101-0202-0303-04

Income RangeIncome Range

% o

f F

ilers

% o

f F

ilers

Source: School and Student Service for Financial Aid (SSS) processing system data

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Sample Trend Analysis

NAIS Trends understood

What about your school

Extending StatsOnline with Excel

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Long Term Trends

Annual giving average up 24% 2002 to 2005Average gift and participation rates:– Current parents $1,00063%– Trustees 5,150 93%– Alumni 358 16% – Grandparents 705 0.3%

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Sample NAIS School

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Step 2: Ratio Analysis

Snapshot of ratios vs. benchmarks

Key questions– Establishing benchmark measures– Understanding differences– Strengths/weaknesses

Tasks– Run reports - Online Financing Schools

Calculator– Pursue resulting lines of inquiry

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20

21

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Honor success with caution

“Even if you're on the right track, you'll get run over if you just sit there.”

Will Rodgers1879-1935

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Data-informed questions

Tuition and financial aid lower than peers– Charging too little? – Charge more and increase the number of

students receiving aid and the aid amounts?

Annual giving per and special events income lower than peers– Opportunity?

“Other income" better than peers– Why? Can this continue?

Salaries and benefits expenses competitive even with smaller budget– How. Can this continue?

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Data-informed questions

Higher student per faculty ratio than your benchmark schools.– Sustainable? How do you know?

Efficient student to teacher ratios and lower average salaries.– Why? Younger faculty? Clever scheduling?

Faculty morale and recruiting time-bomb?

Lower student to administrator ratios– Why? Advantage or inefficiency?

Annual giving participation for parents and trustees favorable, but average gifts are lower. Why? Improving?

Alumni participation rate is extremely low. Opportunity?

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Data-informed questions

Admissions funnel less competitive; student attrition is slightly higher.– External and internal surveying and

marketing needs?

Non-compensation expense per student (i.e., program and instruction-related budgets) is nearly 25 percent lower. Concern or strength?

Endowment per student is significantly lower. Improvable?

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Step 3: Ten Financial Planning Options

Objective assessment of your position on ten key continua

Key questions:– Where do you fit in the market?– Where to want to be?– What fits your mission and inherent

strengths and opportunities?

Tasks:– Study, interpret and debate all of the

above

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Ten Planning Assumptions

1. Market position and pricing

2. Affordability

3. Tuition dependency

4. Staff salaries

5. Program and staff

6. Class size

7. Facilities, equipment & technology

8. Debt

9. Giving

10.Alternative revenue streams

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Market Position and Pricing

• Factors to understand:• Demand, demographics, family incomes• Attrition, signs of pushback on price• Mission imperative relative to tuitions

• Pricing strategy options:• Higher: 5% and above• Moderate: 3 to 5% • Low: Less and 3%

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Affordability

Tuition “Full pay”Income*

% of Families in

US at income Level

% of Income for tuition

Lower $13,635 $99,390

17 – 18%

13.7

Middle $15,675 $106,112 14.8

Upper $17,450 $111,963 15.6

*Minimum income to pay tuition at amount listed. Assumptions: Using SSS Methodology for a family of four, two parents, two children, parents age 45, both work, no assets - parent or student, DC state/other taxes, no COLA

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Selected Planning Assumptions

Faculty salaries– Market trend, future expectations– Competition from public schools– Climate advantage– Attrition, age of faculty– Hiring practices

Class size– Scheduling options– Faculty load– False perceptions and sacred cows

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Selected Planning Assumptions

Facilities, equipment, technology– Age, deferred maintenance– Maintenance cost– Technology integration

Giving– Capacity– Friend raising, seed planting– Expectations and objections

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Step 4: Ten Data Markers of Success

Define numerical markers to measure progress toward goals.

Key questions:– Measures of educational success– Alignment of budget to those measures– Proxies from successful schools

Tasks:– Determine where you stand relative to

markers– Define your basic assumptions

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NAIS Data Marker Guidance

Use to provide context

Indicators that inform, not goals themselves

Understand inter-relationships

Learn to reconcile adjust accordingly– Mission– Location– Endowment– Market position

Avoid ratio envy

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Ten Data Markers of Success

1. Market demand– Greater than 2.5 applications per opening

2. Annual attrition– < 7% day students; < 10% boarding

3. Giving – Parents: > 65% participation, $1,000

average gift– Alumni: > 20% participation, $300 average

gift– Trustees: > 95% participation, $5,000

average gift

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Ten Data Markers of Success

4. Competitive faculty salaries

5. Affordable tuition, moderate increases

6. Financial aid

20% to 25% students receiving aid

Average award 50% of tuition

7. Students ratios

> 10:1 to faculty > 6:1 total staff

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Ten Data Markers of Success

8. Professional development and technology

> 1% of budget for professional development

> 2% for technology

9. Value of endowment

> $25,000 per day student

> $250,000 per boarding student

10.Student outcomes

> 95% matriculate to college

> 95% graduate from college, less than 6 years

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Step 5: Re-engineering Strategies

Develop plans to pursue the objectives you have set

Key questions– Priorities, biggest vulnerabilities– Communication strategies

Tasks– Team or task force formation– Entrepreneurial opportunities

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Possible Strategies

Grow enrollment (without growing staff)

Capitalize upon intellectual property

Full utilization of physical assets

Enhanced fundraising to build endowment

Increase “productivity”

Moderate the arms race for new facilities

Sunset programs. Undertake periodic “sacred cow” hunts.

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Revenue Enhancement Grow enrollment (without growing staff) Capitalize upon intellectual property

Calvert School (MD): curriculum for home-schoolers (net $1.5m/yr). Now one version of website in Russian.

Elmwood Franklin (NY): Achieve! Storefront Tutorials (projected $100K/yr.)

St. Richard's School (Indianapolis): auxiliary education center for tutoring, technology, adult education, testing preparation (SAT), GED

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Revenue Enhancement Capitalize upon intellectual property (con’t)

The Norman Howard School (NY) -- EnCompass: Resources for Learning, struggling learner assessment, coaching, tutoring, college LD assessment & guidance; training/consultation for schools; community workshops and seminars.

San Francisco School (CA): Kids Battle the Grown-Ups trivia game co-authored by 6th graders. Net $70K royalties so far. 2nd game, Kids Rule, now carried by Wal-Mart and Toys “R” Us.

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Full utilization of physical assets:

Lake Forest Academy (IL): Outsourcing to Sodexho weddings ($500K/yr); sale of adjoining property to high-end developer for endowment

Shattuck-St. Mary’s (MN): Building a golf course on adjacent property and selling lots (Net $2M in first year). Also rentals of ropes course for corporate outings.

Many schools: adult ed in evening; sports clubs during class time & weekends (See the “Money” issue of Independent School-Fall 2003.)

Georgetown Prep (MD): Luxury apartments on 3 acres of leased property (Income = $1.3M year on 99-yr lease.)

Hilton Head Prep (SC): Women's wellness Retreat (Summer Session for Moms and their teenage daughters); also: homeschoolers can take one course at the school for 1/5th tuition.

Revenue Enhancement

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2006 Non-Tuition Revenue Survey

Key Findings

– Most common: summer programs (78%), auctions (72%), and extended day programs (63%)

– Least common: adult learning (5%), intellectual property (1%) and franchising (0.6%)

– 36% cited auctions as most significant source of income

– Only 2% exhibited net loss from operating the program(s)

– 75% cited “operations” as the program financed by the revenue; 2nd most frequent was “financial aid” (23%)

Full report www.nais.org. More research to follow.

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Enhanced fundraising to build endowment

Serious deferred giving programs: e.g., most boarding schools.

Grow endowment via a combination of allocating to endowment 1/3rd of all capital campaign, annual giving, and special event proceeds to endowment and/or a commitment of 1-3% of annual budget contribution to endowment.

Revenue Enhancement

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Step 6: Projecting Preferred Scenarios

Project financial alternatives; quantify impact of various strategies.

Key questions:– Impact of plans to bottom line– Likely, possible, and preferred financial futures– Decisions required to reach preferred financial

future

Tasks:– Run numbers using NAIS Financing Schools

Calculator

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Step 6: Projecting Preferred Scenarios

Different assumptions for different projection runs:

First: Change nothing. Last five years' budgetary trends for the next five years.

Second: Reflecting all your goals from step 4 (Data markers of success)

Third: Balancing and making choices

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Sample NAIS School, Anywhere, USA

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Sample NAIS School, Anywhere, USA

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50

51

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First sample projection basedon preliminary assumptions.

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Sample NAIS School, Anywhere, USA

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Deficits in Year 3?Typical Response:Hit the “back button” to increase tuition more.

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Results: Higher tuitionincome stream…

Sample NAIS School, Anywhere, USA

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…and good surpluses forfive years. But falling backinto the same pattern of high tuition increases. The challenge:create surpluses by changingother variables.

The EndThe End

Appendix: Related SlidesAppendix: Related Slides

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Moody’s Update 2005

• “Moody’s continues to believe that the majority of independent schools in our portfolio retain pricing flexibility and will continue to grow total net tuition revenue and net tuition revenue per student. However, this pricing flexibility is finite, and already you have heard some cases where pricing is becoming more sensitive as parents consider lower cost day schools and church-related institutions as an alternate to the more expensive boarding schools. Tuition flexibility is greatest at highly rated schools which typically hold premier academic reputations nationally and increasingly internationally.”

• NAIS: Price is related to demand which is driven by PAVS factors:• Prestige (i.e., perceived “rank” and “status” of school)• Affordability (i.e., perceived affordability)• Value (i.e., perceived outcomes)• Sacrifice (i.e., willingness to use discretionary dollars on education

Often schools price themselves by their desired market position rather than the real market position—and therefore “discount” more heavily.

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Financial Equilibrium

Revenues equal or exceed expenses.

Year after year, the rate of growth in revenues equals or exceeds the rate of growth in expenses.

The value of financial capital is preserved or augmented over time.

The value and functional efficiency of physical capital (i.e., plant, equipment, and technology) is preserved or augmented over time.

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Financial Equilibrium The effectiveness of human capital is

preserved or augmented over time.

The ability to maintain or improve delivery of the school's stated mission is preserved.

Resource allocation is aligned with mission imperatives

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Shifting Aid Applicant Pool

10

.81

0.3

10

.21

0.1

21

.7

20

.2

18

.71

8.4

22

.52

1.3

20

.31

9.8

17

.91

7.6

17

.2

17

.1

11

.81

2.4

12

.51

2.6 1

5.4 18

.1

21 22

.2

0

5

10

15

20

25

30

35

0-20K 20-40K 40-60K 60-80K 80-100K 100K +

00-0101-0202-0303-04

Income RangeIncome Range

% o

f F

ilers

% o

f F

ilers

Source: School and Student Service for Financial Aid (SSS) processing system data

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Middle Income Perspectives:Income Distribution of US Family Quintiles

Source: U.S. Census Bureau web page,

http://www.census.gov/hhes/www/income/histinc/f01ar.html

2003

Lowest 5th up to $24,117

Second 5th $24,118 - $42,057

Third 5th $42,058 - $65,000

Fourth 5th $65,001- $98,200

Highest 5th $98,201+

Top 5% $170,082+

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Affordability Index

Tuition

“Full Pay”Income*

% of Families in US at That Income Level

% of Income for Tuition

Lower $13,635 $99,390

17 – 18%

13.7

Middle $15,675 $106,112 14.8

Upper $17,450 $111,963 15.6

*Minimum income to pay tuition at amount listed. Assumptions: Using SSS Methodology for a Family of four, two parents, two children, parents age 45, both work, no assets - parent or

student, DC state/other taxes, no COLA

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Income Demographics from 1997-2020

0

20000

40000

60000

80000

100000

120000

1997 2000 2005 2010 2015 2020

over 150

125 to 150

100 to 125

75 to 100

60 to 75

50 to 60

40 to 50

30 to 40

20 to 30

10 to 20

0-10

The rich getting richer, the poor poorer… and the middle class losing ground

Impact on Independent Schools? Is this good news or bad news for us?Bad News: trend is for fewer kids at higher income levels—so plan for lower prices…or rightsizing for lower enrollments.

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The Middle Class: Dual Income Family @$75,000 (Source: Harvard Magazine, Feb, 2006 “The Middle Class on the Precipice”)

If independent school tuition is still “the price of a Ford,” why is everyone feeling so pinched now rather than 30 years ago?

The Disappearing Middle Class

The Ford Analogy - a “crime of logic”: one payment every 3-5 years vs. 13 consecutive annual payments for each of two kids.

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Should Tuition = “Cost of a Ford”?

Day Tuitions vs. Cost of a Domestic Car1981-2005 (adjusted for inflation)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1981 1984 1987 1990 1993 1996 1999 2002

Day Tuitions Domestic Car

The problem: Pay for the Ford one time over five years; pay for tuition for 2 kids, for 13 consecutive years.

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Costs of Losing the Middle Class? Resource: “Accreditation & Class Issues” ~Ruby K. Payne

Loss of the value set that the middle class brings to the mix: drivers of work ethic, achievement orientation, and sacrifice for material security.

Absence of balancing tonic for ills of affluence: over-involvement of the parents; intense academic and social competition; misguided parental intervention in student consequences.

Potential barrier to attracting young, idealistic “Teach for America” talent who seek diversity.

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The Data on Class SizePreschool K-5 6-8 9-12 All Student:

Fac Ratio

All NAIS Schools

15.5 17.5 16.0 14.2 16.3 8.6

Catholic NAIS Schools

17.0 17.0 18.0 16.0 17.7 9 .3

Public Schools – Now

21.1 23.6 15.6

Parochial Schools

23.6 23.2 17.2

Public Schools -1950s

30.0 22.0

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Shattuck-St. Mary’s – Supplemental Sources of Income (SSI) Analysis

SSITraditional Revenue Impact?

Facility Development

Ropes Course YES NOT YET YES

Weddings/Banquets YES NO NO

Golf Course Development YES NOT YET YES

Summer Theater/Dance Workshops YES YES YES

Sports Complex Facility YES YES YES

English Language Institute YES YES NO

Learning Differences Symposium YES YES NO

Sports Camps YES YES NO

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Shattuck-St. Mary’s – SSI Details

Was Facility built (B) or Enhanced (E)?

Financed (F) or Donated (D)

ProgramImpact?

Ropes Course B D Leadership Development

Weddings/Banquets E D -

Golf Course Development E & B F&D Golf

Summer Theater/Dance Wisps

E D Recruitment

Sports Complex Facility E & B F&D Athletics

English Language Institute - - Recruitment

Learning Differences Institute

- - Faculty Training

Sports Camps - - Recruitment

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SSI’s: Inspiring Donors to Fund Facilities

Design the program and SSI that a new facility will provide the school. (Soccer development program; lease revenue; Dane Family Field House)

Prepare presentations for donors that show both the program for the students and the SSI.

Fund the program and facility through donations and SSI revenue. (Dane Family Field House: $1.2 mm in donations, $1.6 mm in financing)

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Shattuck-St. Mary’s – Looking Ahead

Under Consideration Existing Asset

Fiber Optic Substation Location, Available Space

Wind Turbines Location, Electrical Usage

International Summer Travel Faculty, H of S relations. Alumni

Hotel Stay Rebates School visitation

Summer Film Festival for students Alumni body

Independent School Credit Card Program Staff credentials

Non Profit Accounting Services CFO experience

Faculty Placement Service Administration’s experience

Incubator for Start Up Businesses Parent body, State interests, HS program, campus, alumni body

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The Demographics of Charitable Giving Source: NewTithing Group, from IRS 2003 Tax

Returns Adjusted Gross Income (AGI) Avg Total Giving

Under $50,000 $ 277

$50,000 - $74,999 $ 1,336

$75,000 - $99,999 $ 2,153

$100,000 - $199,999 $ 3,471

$200,000 - $499,999 $ 8,236

$500,000 - $999,999 $ 20,790

$1,000,000 - $1,499,999 $ 39,817

$1,500,000 - $1,999,999 $ 58,376

$2,000,000 - $4,999,999 $ 100,345

$5,000,000 - $9,999,999 $ 288,540

$10,000,000 or more $ 1,744,229

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TitleTesting HypothesesSource: The McKinsey Quarterly: 4/20/2006

Which pair would you choose given an opportunity to flip over just two cards to test the assertion, "If a card has a vowel on one side, then there must be an odd number on the other side"?

Confirmation Bias: Most incorrectly choose U & 7; 7 offers no new info with a vowel on the back: answer is U & 8. Related to “possession bias”: people 2 to 3 times more likely to prefer what they have to what they may get: coffee mug vs. chocolate experiment: charge $7 to switch, would offer $3.50 to buy.

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Data-driven Decision Making

19th century Rx: Leeches

Pierre-Charles-Alexandre Louis (1830)

Mortality Rates for Treatment of Tuberculosis :

– Leeches: 44% – No leeches: 25%

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Grounding Principles of “Six Steps”

Data-driven rather than subjective

Ongoing rather than start-and-finish

Interactive among school constituencies, board, and staff

Flexible in process, structure, and language

Separates what an organization does (strategy) from how it is structured (design)…

…so that re-design is possible to achieve financial sustainability

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Markers of Success: 5 – 7*Albuquerque Academy Iolani School Sidwell Friends School

Belmont Hill School John Burroughs School Springside School

Breck School Lakeside School St. Albans School

Brunswick School Lick-Wilmerding High School St. Paul's School

Buckingham Browne & Nichols School Marin Academy St. Sebastian's School

Chadwick SchoolMary Institute & St. Louis Country

Day Tenacre Country Day School

Christ Church Episcopal School Memphis University School The Brearley School

Cistercian Preparatory School Milton Academy The Buckley School

Convent of the Sacred Heart New Canaan Country School The Columbus Academy

Dana Hall School Newton Country Day Sacred Heart The Dalton School

Episcopal High School Noble and Greenough School The Head-Royce School

Flintridge Preparatory School Pace Academy The John Thomas Dye School

French-American International School Phillips Academy The McCallie School

Gilman School Phillips Exeter Academy The Pingry School

Girls Preparatory School Polytechnic School The Potomac School

Greenwich Academy Princeton Day School The Roxbury Latin School

Harbor Day School Punahou School The Taft School

Hathaway Brown School Saint Mark's School of Texas The Westminster Schools

Hawken School San Francisco Day School The Winsor School

Horace Mann School Sidwell Friends SchoolUniversity School of

Nashville

*0 schools with 8-10 markers; 60 schools with 5-7 markers; 968 schools with 1 – 4 markers (98%)

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Truth

“Truth never damages a cause that is just.”

Mahatma Ghandi